German inflation to rise in 2023, as economy shrinks

The German economy will contract in 2023 as inflation continues to rise, the country’s leading economic institutes said Thursday, in the latest indication that Europe’s biggest economy is buckling under the pressure from soaring energy prices.

Already at highs not seen in decades, the pace of consumer price rises would continue to “increase further over the coming months”, the think tanks said in a joint statement.

Inflation would come in at 8.4 per cent for the year as whole in 2022, they said, before climbing further to 8.8 per cent in 2023. 

The burst in prices came as Russia has dwindled the supply of gas to Germany, sending the price of the fuel and electricity soaring, and heaping pressure on the economy.

German inflation sat at 7.9 per cent in August, with new figures for September set to be published later on Thursday.

The high cost of energy was the main factor “driving Germany towards recession”, Torsten Schmidt, head of economic research at the RWI think tank, said at a press conference.

Europe’s largest economy would already shrink over the second half of 2022 “before moving into a recovery phase early next year”, Schmidt said.

The turnaround would not be enough to stop the German economy from contracting next year, according to the forecast by the DIW German Institute for Economic Research, the Ifo institute, the Kiel Institute for the World Economy, the Halle Institute for Economic Research and the RWI Leibniz Institute for Economic Research.

The pillar of Europe’s economy would shrink by 0.4 per cent, a significant downwards revision from the think-tanks’ last estimate in April.

Back then, they predicted Germany would grow by 3.1 per cent in 2023. The researchers also slashed their forecast for growth in 2022 to 1.4 per cent from 2.7 per cent.